Not All Pension Problems Were Created Equally

Eric Madiar wrote an interesting op-ed that reviews the state's long record of under-funding its pension systems. If you're following the Illinois pension crisis, you simply can't ignore Eric Madiar.

Eric is the chief legal counsel to Senate President John Cullerton. He has applied his keen mind toward addressing the state's pension funding crisis by seeking out reforms that are more likely to be deemed constitutional. A considerable amount of his time was spent researching archives of the 1970 Constitutional Convention to ascertain the original intent behind the "impairment" clause. 

While some disagree with Eric's conclusions, I can't think of a single person who questions the results of his deep water dive into the history of the constitution's "impairment" clause. Here's Eric's take on why the framers, informed by history, opted to insert the clause:

In 1917, the Illinois Pension Laws Commission warned leaders that the retirement systems were nearing “insolvency” and “moving toward crisis” because of the state’s failure to properly fund the systems. It also recommended action so that the pension obligations of that generation would not be passed on to future generations. 

The warning and funding recommendation went unheeded, as did similar warnings and recommendations found in decades of public pension reports issued before and after the pension clause was added to the Illinois Constitution in 1970. 

For decades, these reports consistently warned the public and lawmakers of the dire consequences of the state’s continued underfunding and of the significant burden unfunded pension liabilities posed for taxpayers. They advised that the pension clause bars the legislature from unilaterally cutting pension benefits of retirees and current employees. 

Indeed, one of the clause’s purposes is to prevent the state from reneging on its pension obligations during a fiscal crisis because of the burden imposed by unfunded liabilities. The clause was added at a time when the pension systems were no better than they are today.

And as it turns out, Illinois has had run-ins with the bond houses before:

These reports also reveal that as early as 1979 Moody’s and Standard and Poor’s advised Illinois that it would lose its AAA bond rating if it did not begin tackling its increasing unfunded pension liabilities. 

Further, a 1985 task force report noted that Standard and Poor’s reduced its bond rating for Illinois from AAA to AA+ because of the state’s “deferral of pension obligations,” and that another rating agency viewed Illinois’ pension funding as a future financial “time bomb.”

And his conclusion:

Given this well-documented history, it’s extremely hard to legitimately believe Illinois’ current situation is so surprising that the state constitution can be ignored and pension benefits unilaterally cut. As noted in my previous legal research, the pension clause does not support such a result.

I've written a previous post about why it's imperative to the broadest interests of the state that the Illinois Supreme Court find SB 1 to be constitutional. Go read that post for the argument, which is rooted in utilitarianism.

Suffice it to say, much of the funding crisis facing the state pension funds has resulted from deliberate under-funding. But what if we had a pension system that was eroding despite substantial funding increases? And what if that system was failing in large part because of severe structural imbalances and inefficiencies? And what if these structural imbalances threatened not only insolvency, but a combination of higher taxes and cuts to critical services in order to pay pensions?

The municipal police and firefighter pension funds meet these criteria and their problems need to be clearly distinguished from those that beset the state funds. Let's review some of the key data points:

• The overall pension payments to retired police officers and firefighters are escalating at an alarming rate. In 2012, $771 million was paid to 16,054 police and fire retirees. That is a 108% increase from payments made in 2004, which totaled $371 million over just 11,730 retirees.

• In 2000, the average funding levels for the municipal public safety pension funds were 74% (police) and 77% (fire). By 2012, these average funded ratios had declined to 56% for both the police and fire funds.

• Despite the funding level declines, employer contributions have risen dramatically and will continue to increase in the years to come. In 2004, employers contributed $109 million into the firefighter pension funds and in 2012 that contribution more than doubled to $290 million. In 2004, employers paid $138 million into the police pension funds and that number more than doubled to $339 million by 2012.

*Statistics from Illinois Department of Insurance (excludes Chicago)

In the case of the police and fire systems, more money is not solving the problem. The local funds are eroding based upon a confluence of factors aligned against their success.

I concluded the following with respect to the municipal police and fire pension crisis in the March issue of the Illinois Municipal Review:

Recent pension reform efforts have been accompanied by the blame game. This unhealthy dynamic results in harsh rhetoric and bitter accusations. And it resolves nothing. An honest analysis recognizes that all parties involved with the municipal police and firefighter pension funds bear some level of responsibility for the current problems. 

In some cases, cities have not made their full actuarial contributions. Public safety unions have made the pension systems more expensive through the pursuit of higher benefits. Previous General Assemblies have sought to accommodate the public safety unions by voting to increase the benefits without providing municipal governments with revenue to offset the higher costs. Local municipal police and fire pension boards have not been able to generate the assumed rate of investment necessary to keep municipal employer contributions from increasing. 

The dramatic growth in unfunded municipal pension liabilities was created collectively. Stabilizing the funds and avoiding the undesirable consequences of inaction will require collective solutions.  

Municipal governments and local taxpayers have a necessary interest in keeping employee pensions affordable. There’s only so much revenue that can realistically be raised to fund municipal government. Our police officers and firefighters have an interest in ensuring that the pension funds that pay their retirement benefits are viable into the future. All parties should commit to fixing the problem, not the blame.

The key takeaway from this post should be that not all pension crises were created equally. The framers of the 1970 Constitution were obviously concerned about the practice of deliberate under-funding as the principle threat to the pension funds and their participants. Under-funding is not the principal cause of the erosion of the police and firefighter pension funding levels statewide. It's been a contributing factor is some instances, but certainly not the sole cause of the problem. 

It's essential to recognize that the problems besetting the police and firefighter funds are the fruits of a very poorly designed system that was never appropriately modernized. We can't fix a deeply flawed system simply by throwing more money into a sinkhole. Arguments asserting that we should simply pump more money into the police and fire systems should be understood for what they are...demands for tax increases. That would be a slap in the face to the taxpayers. We all deserve better.

Updated Polls and Trail Sightings

I'm continuing to add updated polls to the "Polling Place" page. The latest poll of the Governors race shows Rauner leading Quinn by 3 points, which is within the margin of error. The page also has an updated poll chart from Reboot Illinois and an average of the polls from Real Clear Politics. 

Getting into the spirit of the election, here's the cover of the October Illinois Municipal Review magazine. 

I had the privilege of seeing both candidates speak at our annual conference last week. The Governor spent the balance of his time talking about his record and demonstrating his familiarity with various mayors and local projects. Candidate Rauner gave what I'm told is his standard stump speech on the need to fundamentally change the state's political culture.  The reaction to Governor Quinn was receptive and polite, and he received applause following his speech. Candidate Rauner had a few lines that elicited applause from the audience during his speech. I snapped the two pictures below:

GOP Candidate Bruce Rauner at the IML Annual Conference

Governor Pat Quinn at the IML Annual Conference

What's Up With the Tribune's Latest Poll?

As a political junkie I greatly enjoy a good election cycle. This includes following and comparing polling data and methodologies. 

The Chicago Tribune released a poll on September 13 showing Democratic incumbent Pat Quinn with an 11 point lead over Republican challenger Bruce Rauner. This rather large lead for Governor Quinn goes against the grain of almost every other poll that had Rauner ahead. An exception was the Democratic Governors' Association poll that had Quinn up by 3. 

But a poll showing such a stark difference from the rest raises some questions. First and foremost, why is the result so different? It certainly appears to me that the poll is an outlier. And that's not to say that Governor Quinn won't or can't win in November, or that the polling won't oscillate back and forth over the next several weeks. But compared to other polls released around the same time, it provided a result that was, well, weird. Consider these poll results that were released in the neighborhood of the September 13 Tribune poll:

YouGov had Rauner up by 4 (September 11)

DGA had Quinn up by 3 (September 11)

WeAskAmerica had Rauner up by 8 (September 3)

Excluding the WeAskAmerica poll published over a week ago and just focusing on the more recent YouGov and DGA polls suggest that the race is probably very close. And that's why the Tribune poll showing an 11 point Quinn lead is so striking. So what's up?

First of all, most of the polls employed a "likely voter" model. The Tribune poll conducted by APC Research utilized a "registered voter" model. But it gets a little confusing. This morning I listened to the Trib's Rick Pearson discuss the poll on WGN Radio's Sunday Spin (great show). He indicated that it was based on registered voters, but then suggested that the pollster asked the registered voters if they were likely to vote. It doesn't appear that the pollster used the traditional methodologies to determine if a voter was more likely to vote, such as whether they voted in previous elections, if they knew where their polling place was, etc. If the Trib pollster was trying to narrow the universe to likely voters, they used a pretty weak approach. A lot of people will tell a pollster that they intend to vote even though they probably won't show up on election day. That's why pollsters utilize a screening process to determine who really is a likely voter based not on intent, but historical practice. If the Trib pollster used a more involved screening process, it hasn't been fully explained. Since the paper said it polled "registered voters," then that's what I'm going with. And no less than stat guru Nate Silver says that registered voter polling is suspect. 

The second major issue with the poll is that it finds a party identification breakdown similar to a Tribune poll released in the fall of 2008. This equivalency suggests that the electorate will behave as it did in 2008. This partisan breakdown was determined by asking registered voters about their party identity. Even if this partisan breakdown is accurate, the political currents in 2014 are running in the opposite direction compared to 2008. Not only was 2008 a huge Democratic year as a result of war fatigue and an historic meltdown in the financial sector, but it was punctuated by tremendous voter enthusiasm for Barack Obama in Illinois and elsewhere. 

President Obama isn't on the ballot in November and there's a growing sense that the GOP may benefit from structural and policy advantages in 2014 that will result in an electorate favorable to their candidates. Illinois Democrats are sufficiently concerned that their voters won't be as motivated to come out on election day that they are pursuing strategies to mitigate this feared apathy. These include Democratic-favored ballot initiatives, a coordinated campaign with organized labor, and attempts to change the electorate by registering hundreds of thousands of new voters and turning them out. Time will tell if these efforts are ultimately successful. 

The 2014 Governor's race is likely to be very close either way. It's true that polls are just a snapshot in time and that an eternity remains in the Illinois Governor's race. Even so, I suspect that the Tribune snapshot is the equivalent of a blurry photo for the reasons stated above. It will be interesting to see what the next major poll suggests about the state of the race. 

Do Voters Influence Politicians, Or Is It the Other Way Around?

Vox posted a story about a fascinating "chicken or egg" study on whether voters' opinions are influenced by the positions taken by their elected representatives. The study utilized a VERY small sample size (8 state legislators), but suggests that the views of voters can indeed be shifted after learning that their elected representatives hold a contrary view. From the article:

For the first study, with one legislator, Broockman and Butler find that the letters "significantly moved his constituents' opinions to be more in line with his policy positions." Voters who disagreed with the legislator but got a letter were 6.5 percent more likely to agree with him in the follow-up survey. For the second, bigger study, voters getting a letter laying out their legislator's disagreements were about 5 percent more likely to agree in the follow-up than people who got a letter without issue positions stated. 

There's reason to believe that most respondents read the letters they got. In the first study, over 50 percent of respondents getting a letter remembered getting it in a survey performed after the follow-up, compared to just 20 percent of those not getting the letter who erroneously reported receiving one. in the second study, over 60 percent of respondents said they remembered receiving a letter, and voters who got policy letters were likelier to correctly identify their legislators' positions. 

They further found that opinion change was no more likely when an extensive argument was included in the letter; the legislators aren't persuading people with reason and evidence, but with the bare fact that they're the ones holding the positions in question. And legislators didn't suffer a loss in support from constituents they didn't convince: "citizens who received letters from their legislators taking positions they had disagreed with previously evaluated their legislators no less favorably." And while responses to the letters varied for different issue areas, they didn't differ so much that the results were "driven by a small set of atypical issues."

It's surprising that the study conferred no benefit on a legislator that offered a detailed explanation as to why they hold a different view from the targeted constituents. Apparently just an indication of the contrary view was enough to either change the opinion of the voter, or at least not alienate the constituent. 

I have to wonder if the bigger dynamics at play involve (1) whether a legislator is already well-liked by the constituents for which a policy disagreement exists; and (2) whether the constituent is influenced because of their perception that the legislator is paying attention to them by sending a letter. 

As an example, the conventional wisdom is that former House Republican Majority Leader Eric Cantor lost his reelection bid because he lost touch with his constituents. I have to think that Cantor's policy views were probably shared by a majority of participating voters in his district. Even so, he lost his race in stunning fashion because of his perceived aloofness. If voters believe that an elected leader is earnest and accessible, they'll probably cut them a break even if they disagree with them on an issue or two.

I had the privilege while in grad school to attend a guest lecture by a former aid to British Prime Minister Margaret Thatcher. He offered what I thought to be sage advice when he urged my classmates and I to "win the people, not the argument." There's a lot to be said for that. 

To substantially amend Machiavelli, is it better to be liked or agreed with?

Should Illinois Voters Reconsider Cumulative Voting for State Legislators?

Alan Ehrenhalt over at Governing Magazine wrote a brief but interesting history of how state legislatures have evolved. He describes how state legislatures accepted foundation money to professionalize their state legislatures, which entailed longer sessions, additional staff, and higher legislative salaries. 

All of that began to change in the 1960s and even more in the 1970s. One reason was the end of population gerrymandering, as decreed by the U.S. Supreme Court. But an even more important reason was the movement to reform and professionalize legislatures, promoted and largely financed by the Ford Foundation. 

Ford believed that state governments were too antiquated and too secretive to play the role required of them in a changing political system. The foundation supported annual legislative sessions, enhanced staffing and technical capacity, and far greater transparency in communicating with the public. The reformers also called for higher salaries to reflect the new level of responsibility that state legislators should be taking on. 

By 1980, many of the largest states had essentially bought into the reform model. Legislatures in California, Illinois, New York, Pennsylvania and a handful of other places were meeting through most of the year, hiring professional staff to manage much of the workload and ramping up legislators’ pay significantly.

Ehrenhalt describes the reforms as attracting independent, reform-minded legislators that, to reference Wilford Brimley's portrayal of the Postmaster General in a Seinfield episode, "by God got things done!"

If the reformed legislature imposed a financial sacrifice among its participants in many states, it also offered them policymaking opportunities that had not existed in the old days. Most of the new members elected in the early reform years of the 1970s and 1980s were self-starters. They weren’t eased into political service by local power brokers, as their predecessors had been. When they arrived in office, most of them wanted to make a splash right away, and a remarkable number of them did. Minnesota, Wisconsin and progressive-leaning states around the country enacted long lists of legislative initiatives in these years. They imposed new regulations on corporate business and dramatically expanded the social service benefits available to lower-income citizens. Being a legislator in the reform years meant accepting a financial squeeze, but for the politically ambitious, it could be a lot of fun.

But this era of legislative accomplishment (cue the Jaws music) was soon curtailed by the reassertion of power and prerogative by legislative leaders:

But the reform era slowly petered out in the 1990s. States’ legislative leaders began reclaiming the influence that they had lost over the preceding decades. They raised leadership PAC funds to recruit favored candidates in competitive districts, and maintained an influence over these new recruits once the legislative sessions convened. They began showing less tolerance for the mavericks and individualists who had acquired a substantial amount of power in the early reform years.

Perhaps even more important, legislative politics started to take on a sharper partisan cast than had been the case before.

And that's really too bad. I've been lobbying for 15 years and have only been exposed to the "state legislature as dysfunctional Congress" model. I've talked to many who interacted with the General Assembly during the 1970s and have found those folks to be quite nostalgic about how the General Assembly functioned before Illinois' last major legislative reform, the "cutback amendment," was approved in 1980.

The cutback amendment changed the composition of the General Assembly by ending cumulative voting. Cumulative voting provided for the election of three representatives per House district. It also became possible for legislators from a minority party to pick-up one of the three seats in a district that tilted toward the opposing party. This permitted republican voters in democratic districts to have their views represented, and vice-versa. I'm told that legislators had much more independence in those days and were largely free of the kind of political pressure that legislative leaders wield today.

There have been efforts to reintroduce cumulative voting back into Illinois legislative politics. Some even contend that cumulative voting would increase the representation of racial minorities in the General Assembly. It will be interesting to see if those desiring change in the General Assembly will revisit the concept, particularly after hitting a brick wall on the constitutionality of term limits. At the very least, it would be fascinating (if you're a political junkie) to witness a renewed debate about which system of electing legislators is more meritorious.